S7 Ep.34: Matt Lawton - Investing in the blue economy: Is there an opportunity beyond ESG?

Ocean regulates climate, supports biodiversity, feeds communities, underpins huge parts of the global economy. So for investors and asset owners, I hope they'll take away that blue is not separate from green, but it's rather part of that foundation. The global economy depends on oceans, far more than most investors realize, from trade and energy to food systems and climate museums. But as the energy transition accelerates and governments invest in adaptation and infrastructure, the so-called blue economy is becoming increasingly relevant for investors. Today we join by Matt and Otis on T-Roll Price to explore where the genuine investment opportunities are, how investors should think about risk and return, and whether this is evolving into a durable, long-term opportunity. Welcome to Investment on Cut. In this podcast series, we cut through the noise when it comes to investing. We're digging deeper to help bring clarity to your investment decisions. Investment on Cut is brought to you by the investment team at LCP. LCP provides investment advice to some of the largest institutional investors in the UK and beyond, including pension firms, charities, wealth managers, insurers and sovereign institutions. Find out more at lcp.com. Today we join by Matt Lodzinn, head of Impact Fixed Income and T-Roll Price. Hi Matt, welcome. Hi, nice to be here. So together we're going to explore the investment case for the blue economy. We'll discuss where the most compelling opportunities I'm urging and what investors should really understand about this growing theme. But before we start, can you tell us a little bit more about yourself and you can roll and also you path to this position? Sure. So I've been with T-Roll Price for 15 years, started my career at T-Roll and credit research, specifically covering the healthcare sector. I was a research analyst for around seven years and then transitioned into portfolio management. And then it was probably around seven or so years ago, our CIO asked if I would consider taking on and building out an impact fixed income capability. I'm a research analyst at heart. And so the first thing I did when presented with this opportunity is to research what is impact investing and what could it look like. And then at the conclusion of that process, there were three things that came to light. One, there's very clearly a large financing gap, a large need for capital deployment into environmental and social projects. You can look at the UNSDGs as a good framing for that financing gap. Two, and this is the biased point of view, but the global bond market as the world's largest public securities market, I think is well placed to facilitate capital flow from investors like T-Roll Price and asset owners into issuers and projects that are helping to address that funding gap. And then third, my personal belief towards investing, which is capital can do more than just create alpha. We've been doing the art with reasonable success at T-Roll for 90 years. And I think alongside that, you can look at the burgeoning ecosystem of sustainable finance. Green bonds, blue bonds for how investors can capture both the measurable impact and the financial return. And so that brings me to today, as head of impact fixed income, I have portfolio management responsibilities for, let's say three-ish strategies, global impact credit, global impact short duration bond, and a really innovative strategy, which we launched last year, an emerging market, blue economy bond strategy. - Really interesting background you described then, and those three points as well. I'm sure we'll get into it. But before we do, just one of a question we like to ask all our guests, what's one thing we should know about you that we won't find on your CV? - I don't know if there's something you need to know about me, but certainly something that you won't see on my CV, which is at university, I did major in finance, but I also study philosophy. And I had great interest in those early years reading the likes of Aristotle, Socrates and Plato. I was really intrigued and fascinated by ethics and morality. And then as I progressed through my educational career, how those concepts show up in business decisions. You will see from my CV that I attended Boston College at a Jesuit university that really instills this mindset of service for others. And I can say now I spend more time with bond documents and I do ancient Greek philosophers, but the underlying question that we're trying to grapple with is similar, which is how do we make good decisions when the answer is not always obvious? - In some ways, you kind of switch from one form of complex technical thinking perhaps, so another form of also complex technical thinking. - Exactly right. - So Matt, you were talking about research earlier, so we're going to talk about real economy throughout this podcast. Before we start, could you tell us how do you define the blue economy as an investor? Why should investors think about it today? Why do you think investors should know about blue economy and what it means? - At its simplest, I define blue economy as the parts of the global economy that are linked to oceans, coast, rivers, and water systems. So that's not just your traditional ocean sectors like shipping ports and tourism, but also areas such as water infrastructure, wastewater management, coastal resilience. But with an important qualifier in that, all of these projects that I just described, they need to be considered sustainable. And how I define sustainability is, well, we have our own sort of frameworks at your price for how we underwrite to sustainability, but I would just, for the benefit of others, just flag IFC guidelines on blue finance, which was published last year that dies into the spectrum of blue economy project categories, qualifying criteria, impact indicators, a very useful framework for how investors can qualify blue economy projects as sustainable. So to your question in terms of why should investors think about it now, I think we're at this really compelling intersection of one, we talked about financing gaps in earlier, the two UN sustainable development goals that tie into the blue economy. So SDG six, clean water and sanitation, and then SDG 14, light below water, are two of the least funded of the 17 sustainable development goals and an SDG 14 being the least funded. So I think we're at this really interesting intersection between the funding gap and now, the potential for value creation from blue economy project. So I live in fixed income. So blue bonds are the most obvious demonstration of how we can capture this opportunity. So thinking about value creation, if a company or a sovereign, they issue a blue bond that can say, one, catalyze new sectors that generate revenue, like sustainable fisheries or marine ecotourism. Two, it could improve long-term productivity of marine resources that can extend lifespan of valuable ocean assets. Or three, reduce climate-related losses by funding coastal defenses, such as coral refrasteration, mangrover recovery. That ties in the financial materiality aspect to these types of projects. So it's at this really interesting intersection where now we're getting value creation from these projects and there's a very large financing gap. So I think that's why investors should be thinking about this more critically now. - Think about some of the examples just said. The Shippen one, I think is one that most people wouldn't generally think of as being part of the blue economy, at least from a kind of lay person. So you'd think Shippen, they think exposure to global trade, they think GDP, they're not thinking per se about, I guess, our ocean season rivers. So obviously this definition can be a little bit difficult to grapple with sometimes. But how does something like Shippen fit in with that definition of the blue economy? - Absolutely. So there are some helpful frameworks in place that help provide investors and issuers and asset owners with a framework for qualifying these projects as quote sustainable. And so things like retrofitting ships to run on cleaner fuels, electrification, a port equipment, cleaning up areas in and around ports. And there's been a number of large transactions in the market that have financed these types of projects. And then they will qualify those projects with things like the IFC Guidelines on Blue Finance or EU taxonomy that have very clear thresholds in place for say how much GHG emissions need to be reduced. If it's going to qualify as blue, if it's going to qualify as sustainable. So I take your point in that it may be at first glance or listen, it doesn't sound as sustainable. But once you look into the frameworks and the definitions, you'll see that there's credible pathways. It is a really important sector, right? Decarbonizing marine activity, maritime activity, there's a large pool of capital that's needed to finance this type of transition. It's about the use of that financing rather than the sector, which potentially makes my next question tricky to answer. But where are the compelling opportunities here in this space? And I don't feel like it's per se a sector view on it, but you'd think about it in a different way when you think about where you might want to invest. - Yep, we're very excited about the decarbonization of maritime activity, so all those shipping projects, I just mentioned, but I'd also flag water infrastructure. So wastewater, treatment, storm water systems, flood protection, desalination, where appropriate and managed appropriately. These are often essential projects with very long asset lives. And take clean water and wastewater management, for instance. One of the real attractive features in some cases is that the water utilities that are deploying the capex into these types of projects often earn a very predictable, stable, regulated rate of return that helps improve the finance ability of the projects, that helps us as investors financially underwrite to these types of projects. And then also, if done credibly, we can get the right impact indicator. So whether it's number of individuals provided with clean drinking water or G.S.G. emissions avoided as a result of the wastewater treatment facilities that are improved. So there's credible pathways for both the financial side as well as the impact side in this water infrastructure broader theme. - Talking about how investors can access this theme. I know you'll put your hands on the floor. for a manager for fixed income portfolio, but would it be easier to access these blue economy theme through public opportunities or infrastructure or private markets? So do you think that fixed income is the best way to get access to this? I think all offer different considerations. So it depends on the investor's objective ultimately. Public equities to your point, it can provide diversified exposure into listed companies and say water technology, infrastructure, shipping, etc. But the blue purity may be a bit lower. You are largely transacting on the secondary market and they can be challenging from an investor standpoint to attribute how your investment is translating into specific blue assets to specific measurable impact. The second you highlight infrastructure or maybe private markets, that's a very natural fit for some, right? So water utilities, ports, marine infrastructure, long duration asset back to exposure, obviously the downside here is that there's less liquidity and it can be more challenging to build a diversified portfolio of blue projects. So from a fixed income perspective, we find the labeled and use of proceeds instruments. So like blue bonds that are finance, incredible ocean or water projects, that's a very practical way to access the theme with liquidity, with diversification. And then the use of proceeds format is really appealing because investors can then track how their capital is going to specific projects with specific measurable impact. And the last thing I'd say here is we find that to be really compelling for our clients because then they can attribute how much impact their capital is helping to generate because we have that form of measurability. It sounds like this might be a bit of a misconception because when you spoke about the listed market, it reminded me of green gills, the fact that the UK government issued debt, but the money that they raised was never hypothesated and directed and side pocketed. Have you ever described it specifically towards green projects? It just went into the general pot of money to spend for things. It sounds like that's different here when we're talking about the blue economy. You hit on a great point in that the way that issue where structure of these bonds matters a lot. We've seen plenty of examples, not just in blue, but in green and social bonds where there's a really good story, there's a really good ESG commitment from an issue level, but the structuring of the bond is very poor. It goes into a general pool of money. There's no reporting or maybe they're refinancing old projects. And so when we're looking at whether it's a blue bond or any impact bond, we're very intentional in conveying to the issue or the underwriter around the importance of the money and capital going to fund new projects that's generating a degree of additionality. I can't say that every blue bond presents with that feature, but again, we're very intentional and we speak to market stakeholders around advocating and really encouraging issuers to allocate to projects that are financing new projects additional in providing that degree of measurability that sometimes isn't always the case and impact fixed income. Would you be able to walk us through a couple of blue bonds that I've done really, really well? I know that earlier you were talking about shipping opportunities. There is there another couple of examples that you could give us. Sure. I'll talk on maybe a transaction that I think does a good job of demonstrating the different orders of impact that are generated in one of these blue economy transactions. So DP World issued a $100 million blue bond in December of 2024. DP World won the world's largest port and logistics operators and the projects that were financed were along the SDG 14 type spectrum, which is really exciting because in public fixed income, it can be really challenging to get ocean type exposure through the bond market. So we work with DP World for a number of quarters to help structure the bond, identify usaprocies, how to measure the impact, etc. But if I just zoom out from this transaction, what was really appealing or I'd say interesting about it is that there are what I would say three orders of impact that are generated from this bond. So one, the projects that DP World is allocated to, sustainable shipping, marine pollution prevention. So cleaning up the waste and plastic around their ports and coral refrestoration, which is supporting marine biodiversity. So the first order of impact is that capital goes to these projects. Those hopefully generate good measurable impact. The second order of impact is by working with DP World to help structure this bond, help anchor finance this bond into the market, bring out this transaction. There's a crowding in effect that takes place. So by us working with an issuer to issue a bond that attracts outside investment capital from other asset managers that maybe wouldn't have been able to get exposure to this type of transaction. So there's a crowding in effect that takes place. That's the second order of impact. And the third is as the proceeds from the bond are dispersed, there's capex going to on the ground companies provided the next wave of innovation. So in the case of this bond, DP World was working with a company called Coral Vita. Coral Vita produces artificial coral reefs that helped provide better marine biodiversity conservation that helped mitigate warming waters that has a positive multiplier effect. So we're also helping to fund the next wave of innovation companies, coral leaders of the world. So I think that's a really compelling way to demonstrate how impact is occurring across multiple dimensions in maybe what is just otherwise a kind of simplistic lead scene transaction. And the impact side is one lens that institutional investors will think about. The other is for one to a better term, there's traditional kind of risk and return metrics. But for this kind of deal, what kind of economics are you getting investors, what you might have seen in the board, a cook up bond market, for example. So in the case of this particular bond, the transaction was a five year bond that priced with a modest concession relative to the second areas, trading levels for DP worlds, existing curve. So we as investors were able to get a little bit of a liquidity premium. Also, we're underrated the issue. We're on a fundamental basis. This is a company that's been upgraded a number of times over the years has a high quality fundamental profiles, one of the leading players within this sector. So it was really compelling from a fundamental standpoint. And then the impact obviously was very attractive for us as well. I don't know if it's for the extent there's a narrative around because of the way that the money is being used from this bond, it's managing a risk that would exist to the company of wise. And to some extent, that's better risk management for the initial coupons you get. And so I'd speak. 100% in the fact that they are financing projects that are aligned in the case of DP world has a larger enterprise level ocean strategy and climate strategy. And so this type of project spend has a natural alignment and fit with the company's overall climate and ocean objectives. We've been talking about today a lot. If we think about 10 years from today, quite far away, what part of the blue economy do you think investors wish that I don't the studs? But because you know, as you've been saying, it's quite a lot involved. It's not just one sector. It's a lot of multiple sectors within the blue economy investment theme. Which part do you think we should be most thinking for me? It's coastal resilience. So a huge share of the global economy obviously sits along near coastlines. And so bringing it to the economic, the cost of protecting ports, cities, real estate, to your point, a lot of different sectors are impacted. Supply chains from issues like flooding and extreme weather is becoming much more visible and is becoming a lot more economically material. Now I can certainly see that I'm no expert in the blue economy by grew up in the coastal town. And there are huge amounts of work being done to protect the coastline because you got these cliffs that are being eroded and they're falling down. You've got the seaside with beach huts on there washed away every winter. And so as millions of pounds going into create these defensive all the way along the southwest coastline. Right. And it's one of those that it builds or roads very slowly and slowly and then all of a sudden you're faced with a material issue. And so to the question around, what are we going to look back on 10, 20 years from now? I think this is going to be really critical from the economic perspective. A grade. Well, we've kind of worked through the conversation or see setting out what the blue economy is and trying to give a bit of flavor through a case study and how it actually works. But if it's on the conversation map, what's one thing you'd like listeners to take away? So when I started studying this space, there was a quote that I came across early on that has stuck with me and it's from a marine conservation of Sylvia Earl who said, there is no green without blue. And to me, what that means is that we cannot have a credible climate or sustainability strategy without recognizing the role of oceans and water systems. We've been talking around this earlier ocean regulates climate, supports biodiversity feeds communities underpins huge parts of the global economy. Matt, do you have any recommendation for listeners about any books, TV, film, podcasts that you like to I've read what you're listen to? I get enough of the blue economy at work. So I try to get some other interest outside. So a book I recently reread, but I find it to be really interesting as a book called Deep Work by Cal Newport. It's really about the value of sustained focus attention in the world that is seemingly designed to fragment it. I'm guilty of this, trying to multitask, but I think the ability to concentrate deeply is becoming increasingly important in any form of knowledge work, whether it's investing business or leadership. And then when I want to switch off a podcast that I find really entertaining as one called Drop. with Jim Farley, Jim Farley's CEO of Ford. He brings on a wide range of guests from athletes and entertainers and business leaders to talk about cars, the cars that they drive, and then also what drives them in their specific field. - Great, well thank you so much for joining us, Matt, today. - Great, thanks for having me. (upbeat music) - HLCP Investment and CUT Podcasts is for information on marketing purposes only and does not constitute any form of investment or financial advice or financial promotion under the financial services in markets actually size. All of these expressed by the podcast hosts and guests are purely their own opinions and do not represent those of LCP, its clients or affiliates. LCP does not provide any warranty guarantees or representation as to the accuracy or sufficiency of the information featured in this podcast. POST Performance is not indicative of future returns. Our podcast listeners should always seek independent financial or legal advice before making any financial or investment decisions. 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